Income tax rates have been at the center of recent policy debates over taxes. Some policymakers have argued that raising tax rates, especially on higher income taxpayers, to increase tax revenues is part of the solution for long-term debt reduction. For example, the Senate recently passed the Middle Class Tax Cut (S. 3412), which would allow the 2001 and 2003 Bush tax cuts to expire for taxpayers with income over $250,000 ($200,000 for single taxpayers). The Senate recently considered legislation, the Paying a Fair Share Act of 2012 (S. 2230), that would implement the āBuffett ruleā by raising the tax rate on millionaires.

Other recent budget and deficit reduction proposals would reduce tax rates. The Presidentās 2010
Fiscal Commission recommended reducing the budget deficit and tax rates by broadening the tax
baseāthe additional revenues from broadening the tax base would be used for deficit reduction
and tax rate reductions. The plan advocated by House Budget Committee Chairman Paul Ryan
that is embodied in the House Budget Resolution (H.Con.Res. 112), the Path to Prosperity, also
proposes to reduce income tax rates by broadening the tax base. Both plans would broaden the tax
base by reducing or eliminating tax expenditures.

Advocates of lower tax rates argue that reduced rates would increase economic growth, increase
saving and investment, and boost productivity (increase the economic pie). Proponents of higher
tax rates argue that higher tax revenues are necessary for debt reduction, that tax rates on the rich are too low (i.e., they violate the Buffett rule), and that higher tax rates on the rich would
moderate increasing income inequality (change how the economic pie is distributed). This report
attempts to clarify whether or not there is an association between the tax rates of the highest
income taxpayers and economic growth. Data is analyzed to illustrate the association between the
tax rates of the highest income taxpayers and measures of economic growth. For an overview of
the broader issues of these relationships see CRS Report R42111, Tax Rates and Economic
Growth, by Jane G. Gravelle and Donald J. Marples.

Throughout the late-1940s and 1950s, the top marginal tax rate was typically above 90%; today it
is 35%. Additionally, the top capital gains tax rate was 25% in the 1950s and 1960s, 35% in the
1970s; today it is 15%. The real GDP growth rate averaged 4.2% and real per capita GDP
increased annually by 2.4% in the 1950s. In the 2000s, the average real GDP growth rate was
1.7% and real per capita GDP increased annually by less than 1%. There is not conclusive
evidence, however, to substantiate a clear relationship between the 65-year steady reduction in the top tax rates and economic growth.

Analysis of such data suggests the reduction in the top tax rates have had little association with saving, investment, or productivity growth. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. The share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. The evidence does not suggest necessarily a relationship between tax policy with regard to the top tax rates and the size of the economic pie, but there may be a relationship to how
the economic pie is sliced.

I'd much rather see corporate taxes cut for companies that locate and employ in the USA.

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Effective tax rate is already pretty low. Nominal tax rate seems high, but nobody pays that. We should just lower the tax rate to the nominal rate, since the only people paying that high rate are the medium sized businesses that are too big to file as a person (owner) but can't afford an army of lawyers to shuffle funds to obscure mail boxes in Dubai using complex schemes.

I am still waiting for that wealth to trickle down, as promised by Reagan....

Should I give up????

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You should Darryl absolutely.

As a theory - it "should work". But the theory doesn't account for one critical input, human beings.

In a previous post here (discussing this topic with WP) I likened trickle down wealth (taxes) to taxes levied on cigarettes.

In each case, taxes are being used as a vehicle to induce a desired behavior. In the case of trickle down wealth, the theory (as we know) is to tax the top less, and their gains will be passed on down the line. In the case of cigarettes, you tax them more to drive people to smoke less.

In both cases, the desired outcome can work for some, but wont for all. I'm a smoker....and the taxes used to raise a pack of cigarettes to 8.40 a pack here in MA have had zero impact on my consumption. Am I dumb/selfish/[enter your term]? One could say that. But what I do know is I am is an example of where taxing (or not taxing) a behavior just doesn't work....because at the end of the day, my addiction/desire/wants/needs outweighs the "cost" of doing so.

I think the same idea can be applied to trickle down. Sure, if you lessen the tax burden on some folks, they will turn around and "pay it forward" which jobs, increased investment etc etc etc. But there are just as many (if not more) who will just take that increase and use it for their wants/needs.

Tax increases certainly do not lead to economic growth. Or is there a study, like this one, that claims that it does.

I guess that it was just a coincidence that under Reagan 22 million jobs were created? Clinton had jobs created with slightly higher tax rates but that could be have due to the .com bubble. And W had jobs created with the current tax rates but that could have been due to the housing bubble.

I do know when they passed a tax on "luxury items", the middle class lost jobs and small business hurt, but the rich still were rich.

It's really not about rates anyway. It's about revenue and spending. I'd like to see a flat tax and a small national sales tax.

Tax increases certainly do not lead to economic growth. Or is there a study, like this one, that claims that it does.

I guess that it was just a coincidence that under Reagan 22 million jobs were created? Clinton had jobs created with slightly higher tax rates but that could be have due to the .com bubble. And W had jobs created with the current tax rates but that could have been due to the housing bubble.

I do know when they passed a tax on "luxury items", the middle class lost jobs and small business hurt, but the rich still were rich.

It's really not about rates anyway. It's about revenue and spending. I'd like to see a flat tax and a small national sales tax.

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Correlation does not equal causation.

If it did, you'd concede that Republican policies lead to massive economic failure. (00-08)

We currently have a spending problem. Started with Bush and perpetuated by the current administration. Policy uncertainty and spending. Fatal! Most people dont pay taxes. If we spent less dough even less people would have to pay tax, look at it that way.

We currently have a spending problem. Started with Bush and perpetuated by the current administration. Policy uncertainty and spending. Fatal! Most people dont pay taxes. If we spent less dough even less people would have to pay tax, look at it that way.

What is the mechanism by which tax policy leads to skewed distribution of income? We may be dealing with correlation vs. causation. I think a larger contributor to declining wages as a percentage of GDP and the concentration of wealth is that our current environment heavily favors both big business and big government.

Overall, federal workers earned an average salary of $67,691 in 2008 for occupations that exist both in government and the private sector, according to Bureau of Labor Statistics data. The average pay for the same mix of jobs in the private sector was $60,046 in 2008, the most recent data available.

These salary figures do not include the value of health, pension and other benefits, which averaged $40,785 per federal employee in 2008 vs. $9,882 per private worker, according to the Bureau of Economic Analysis.

Could the argument be made that by cutting the Military Budget by $X, that those Federal Dollars would be invested into another sector of the country/economy?

If so, then wouldn't there be an increased demand in those sectors?

I'd much prefer spending $$ on creation/improvement than destruction.

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Beyond that we are at the point where the entire defense budget is funded by borrowing. If the majority of that borrowing comes from other countries (currently the majority comes from money printed by the Fed) that puts us in a pretty vulnerable position.

Could the argument be made that by cutting the Military Budget by $X, that those Federal Dollars would be invested into another sector of the country/economy?

If so, then wouldn't there be an increased demand in those sectors?

I'd much prefer spending $$ on creation/improvement than destruction.

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Like what?

the one side effect of much of what is spent on defense is the jobs that get created at defense contractors. I'm not saying it shouldn't be cut, but I'm not sure there is some other place in government to spend the money that will produce any kind of return on investment

the one side effect of much of what is spent on defense is the jobs that get created at defense contractors. I'm not saying it shouldn't be cut, but I'm not sure there is some other place in government to spend the money that will produce any kind of return on investment

spending it on entitlements is not the answer.......that's a zero ROI

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I was thinking about bigger things....like an "Energy Race".

I wouldn't spend it on Entitlements.

Finding a true replacement for fossil based fuels would have wide ranging positive impacts for us.